SEC Division of Investment Management staff letter: Townsend and Associates, Inc.

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UNITED STATES .' ; I r~i i ti ¡jru ¡ ~,.. '...) ~,;\ c~"". '.'" .n, J P' ;:';1 ~'A "¡,, .~. . ff. 'Wj'; !:
SECURITIES AND EXCHANGE =MMISSlcl ..... "-~' r~ -"'i!'r..:..'! I'. '':~?. 'i.... ..' '", ',_ . f :i5.¡;' ~Ci; tti -...... . WASHINGTON, D.C. 20549 w,3a -- --;:
DIVISION OF

INVESTMENT MANAGEMENT
September 21, 1994

Mr. Jeff Townsend

Townsend and Associates, Inc.

1120 Lincoln Street, suite 708

Denver, CO 80203

Dear Mr. Townsend:

In your letter dated August 10, 1994, you state that you are

a licensed broker and that you refer all of your clients to an

asset manager, who in turn pays you a referral fee. You also

state that you sell insurance products, and that, upon client

request, you place IRA or SEP lIRA investments with, or forward

monay to, Oppenheimer. Finally, you state that you do not advise

clients as to which funds are appropriate investments.

You ask whether, as a result of these activities, you must

register as an investment adviser. We have provided general

guidance regarding the circumstances in which a broker-dealer

must register as an investment adviser and specifically addressed

the consequences of a broker-dealer receiving referral fees from

an investment adviser.
Section 202 (a) (11) of the Investment Advisers Act of 1940
(the "Advisers Act") defines "investment adviser" as:

any person, who, for compensation, engages in the

business of advising others, either directly or through

pUblications or writings, as to the value of securities

or as to the advisability of investing in, purchasing,

or selling securities, or who, for compensation and as

part of a regular business, issues or promulgates

analyses or reports concerning securities . . . .

A person who meets the definition of investment adviser is

required to register with the Commission as an investment

adviser, unless he or she is otherwise excluded from the

definition or exempt from registration. The Advisers Act

contains an exclusion from the definition of investment adviser

for any broker or dealer, including a registered representative

of a broker-dealer, who performs investment advisory services

that are "solely incidental" to the conduct of his or her broker

• 2
  dealer business and who receives no "special compensation" for

providing advisory services.lI

Because the determination of whether investment advice is

solely incidental to your activities as a broker is fact-

specific, we cannot definitively determine from your letter

whether your advisory activities are solely incidental to your

brokerage acti vi ties. While the term "solely incidental" is not

defined in the Advisers Act or the rules thereunder, the staff

has provided some guidance on its meaning. The staff has taken

the position that the following activities may not be solely

incidental to the conduct of a broker-dealer i s business:

as part of an overall plan that

assesses the financial situation of a customer and formulates a

financial plan,y and (2) performance of investment supervisory

services or other investment management services tailored to the

specific long-term investment needs of individual clients.Jj

(1) advisory services offered

We cannot determine from your letter all the sources of your

compensation, but we can provide you with the following guidance.

The staff has stated that, for purposes of the broker-dealer

exclusion, special compensation generally refers to compensation

other than commissions from brokerage transactions. For example,

if a broker-dealer has two general commission schedules in

effect, and the higher schedule includes investment advice, the

broker is receiving special compensation.!! In contrast, a

broker-dealer charging all clients the same commission for

brokerage transactions while only some clients receive investment

advice is not receiving special compensation.2j

Al though you do not fully describe your compensation

arrangement, you do state that you receive referral fees from

investment advisers for whom you solicit clients. The staff

takes the position that broker-dealers that receive cash referral

fees for referring clients to an investment adviser are not

1/ Section 202 (a) (11) (C) . y Investment Management & Research, Inc. (pub. avail. Jan. 27,

1977) .
~ Investment Advisers Act Release No. 471 (Aug. 20, 1975).

!! Robert s. Strevell (pub. avail. Apr. 29, 1985).

2j SEC v. National Executive Planners. Ltd., 503 F. Supp. 1066 (M.D.N.C. 1980).

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  receiving "special compensation."Y Separately, you should note that rule 206 (4) -3 under the Advisers Act regulates cash referral fee payments by registered investment advisers, imposing certain

obligations on both the adviser and' the recipient of the fee. I

have enclosed a copy of the rule for your information.

In conclusion, if you provide investment advisory services

that are solely incidental to your broker-dealer business and

receive no special compensation for such services, you may rely

on the broker-dealer exception and do not have to register under

the Advisers Act. Finally, we note that your stationery suggests

that Townsend and Associates is a "Registered Investment

Advisor." If, as you stated in your telephone conversation with

Amy Doberman of this office, this representation applies to

Consolidated Investment Services, the registered broker-dealer

with which you are affiliated, you should alter your stationery

to clarify this representation.1/

If you have further questions you may write or call this

office at (202) 942-0660.

Sincerely,
~~.~ Barbara Chretien-Oar
Senior Counsel

Enclosure
Y Koyen, Clarke & Associates, Inc. (pub. avail. Nov. 10, 1986) . 1/ It may violate the antifraud provisions of the federal

securities laws for a b:ioker-dealer to employ the terms

"financial adviser" or "financial consultant" merely as a

device to induce the sale of securities. Security Sources

Inc./Robert E. Frey (pub. avail. May 18, 1989).

--
TOWNSEND AND ASSOCIATES, INC.

A STRATEGIC FINANCIAL CONSULTING FIRM

Jeffery E. Townend, R F P A Member of the BDC Consulting Group 1120 Lincoln Street, Suite 708

President Denver, Colorado 80203
(303) 832-7153
August 10, 1994
ACT IA
SECION ;: ('):; C Q iei I) C c)
RULE Ofce of the Chief Counl
Division if Investent Magement PUBLIC Secties and Exchage Commssion A V AILABILITY Ci - .2 i - cr4

450 Fif Street, NW
Washington, DC 50249
Dea Sirs,
Recently I read an arcle in the Financial Planng News regarding Investment Advisers. The arcle revewed and answered questons whether one should become registered as an investment adviser. The one questons tht I stll have is ths:
If I am a licensed broker and choose to refer al my clients over to an asset mager, who in tu pays me a referr fee, am I still obligated to register as an investment adviser? I still contiue to sell insurance products, and on occaion, per client request wi place IR or SEP/I investents, or forward funds to Oppenheimer, again, per my clients request. I do not advise the client as to which fud the moneys should go, I only provide cuent infomiation to them and let them decide what to do. I would appreciate any information you can supply me, Sincerely, Jeff Townend Securities offered through Consolidated Investment Services, Inc. . Member NASD, SIPC, MSRB & NFA Registered Investment Advisor